Term Sheet Template: How to Write One

A term sheet is the document where a financing deal actually takes shape. Before any lawyer drafts a stock purchase agreement, before money moves, the founder and the investor agree on a short summary of how the deal will work: how much money, at what valuation, and who controls what. Get the term sheet right and the closing is mostly paperwork. Get it wrong and you spend the next decade living with terms you didn't understand when you signed.

This guide walks through what a term sheet is, which parts are binding, the clauses that decide who makes money, and how to write one without giving away more than you mean to.

What Is a Term Sheet?

A term sheet is a short document that outlines the key terms of a proposed investment. It's the handshake written down. An investor offers to put money into a company, and the term sheet records the price, the structure, and the rights that come with the check.

The thing that confuses most first-time founders is that a term sheet is mostly not a contract. It's a statement of intent. Both sides expect to negotiate the real legal documents (the stock purchase agreement, the investor rights agreement, the amended charter) over the following weeks. The term sheet just sets the anchors for that negotiation.

That said, "mostly not a contract" is not "not a contract at all." A handful of clauses bind you the moment you sign, and those are the ones that bite. More on that below.

Term sheets show up most often in venture capital rounds, but the same structure is used for angel investments, private equity deals, and convertible rounds. The names of the clauses change with the round, but the job is the same: agree on the shape of the deal before the lawyers fill in the detail.

Binding vs. Non-Binding: The Part Everyone Gets Wrong

Read any term sheet and you'll find a sentence near the end saying something like "except for the sections titled Confidentiality and Exclusivity, this term sheet is non-binding." That sentence is the most important one in the document.

Non-binding terms are everything about the money: valuation, the size of the round, liquidation preference, board seats, option pool. None of it is locked until the definitive documents are signed. Either side can walk, and the numbers can move.

Binding terms are usually three things:

• Confidentiality. Neither side discusses the terms publicly. This works much like a standalone non-disclosure agreement, and some investors ask for a separate NDA on top.
• Exclusivity (the "no-shop"). For a set window, often 30 to 60 days, the company agrees not to shop the deal to other investors. This protects the investor's diligence costs. Push for a shorter window and a clear expiry date.
• Costs. Who pays legal fees, and what happens to them if the deal dies. Cap the investor's legal costs in writing; an uncapped "the company pays investor counsel" line can run into five figures.

When you write a term sheet, say plainly which clauses bind and which don't. Ambiguity here is where disputes start.

The Clauses That Decide Who Makes Money

A term sheet has a lot of lines, but a few of them do most of the work. These are the ones to understand before anything else.

Valuation: Pre-Money and Post-Money

Two numbers matter. Pre-money valuation is what the company is worth before the new investment. Post-money valuation is pre-money plus the new money. The investor's ownership is their investment divided by the post-money figure.

If an investor puts in $2M at an $8M pre-money valuation, the post-money is $10M, and they own 20%. That stays simple until the option pool enters the picture.

The Option Pool Shuffle

Investors usually require an employee option pool, and they usually want it created before the round, out of the founders' shares. A "15% post-money option pool" sized this way effectively lowers your real pre-money valuation, because you're funding the pool dilution alone. This is one of the most common places founders lose value without noticing. Negotiate the pool size based on an actual hiring plan, not a round number.

Liquidation Preference

This clause decides who gets paid first when the company is sold. The standard, founder-friendly version is 1x non-participating: investors get their money back before common shareholders, or they convert to common stock if that pays more, but not both.

The version to resist is participating preferred ("double dip"): investors take their money back first, then share the remaining proceeds with common shareholders. On a modest exit, participation can swallow most of what the founders and employees expected to take home. Watch also for multiples above 1x, which are a red flag outside of distressed deals.

Board Composition and Control

Money buys influence over the board. A term sheet specifies how many seats the investor gets and how board decisions are made. Early rounds often keep founders in control of the board; later rounds shift it. Pay attention to protective provisions: the list of decisions (selling the company, raising more money, changing the charter) that require investor approval regardless of board math.

Anti-Dilution

If you later raise at a lower valuation (a "down round"), anti-dilution provisions adjust the investor's share price to compensate. Broad-based weighted average is the standard, reasonable form. Full ratchet is punitive and re-prices the entire earlier investment as if it had come in at the lower price. Avoid it if you can.

Founder Vesting

Investors almost always want founder shares on a vesting schedule, even though founders already own them. The usual ask is four-year vesting with a one-year cliff, so that a co-founder who leaves after six months walks away with little or no equity. If you've already been building the company for a year before the round, negotiate credit for that time so part of your stock vests immediately. This clause protects everyone who stays, including you, by keeping shares with the people still doing the work.

Pro-Rata and Information Rights

Two quieter clauses shape the relationship after closing. Pro-rata rights let an investor put more money into future rounds to keep their ownership percentage from shrinking. Information rights entitle them to regular financials and, often, a budget. Neither costs you much on a clean deal, but both can become burdensome if a small investor demands the same reporting as your lead. Reserve the heavier rights for investors writing meaningful checks.

How to Write a Term Sheet: Step by Step

You can draft a term sheet yourself. Here's the order that keeps it clean.

Step 1: Name the parties and the instrument. State who is investing, who is receiving the money, and what they're buying: priced equity (Series Seed, Series A) or a convertible instrument (SAFE, convertible note). The structure changes which clauses you need.

Step 2: State the amount and valuation. Give the total round size, the investment from this investor, and both the pre-money and post-money valuations. Spell out the resulting ownership percentage so there's no arithmetic dispute later.

Step 3: Define the option pool. State the target pool size and, critically, whether it's created before or after the money goes in. This single line moves real value.

Step 4: Set the liquidation preference. Write "1x non-participating" if that's the deal. Be explicit; silence here defaults to whatever the investor's lawyers draft.

Step 5: Lay out governance. Board seats, voting, and protective provisions. Keep this proportionate to the size of the check.

Step 6: List the investor rights. Information rights, pro-rata rights to invest in future rounds, and any rights of first refusal or co-sale on founder share transfers.

Step 7: Add the binding clauses. Confidentiality, exclusivity with a hard expiry date, and a cap on legal costs.

Step 8: Mark what binds. Add the sentence that states the document is non-binding except for the clauses you just listed. Then date it and leave signature lines.

Common Mistakes Founders Make

A term sheet looks short and friendly, which is exactly why it's dangerous. The traps:

• Optimizing for valuation alone. A high valuation with a participating liquidation preference and a fat pre-round option pool can pay you less than a lower valuation with clean terms. Read the whole sheet, not just the headline number.
• Signing a long exclusivity window. A 90-day no-shop hands the investor leverage and stalls your fundraising if they drag their feet. Keep it to 30 or 45 days with a firm expiry.
• Ignoring the binding clauses. Founders skim past confidentiality and exclusivity because they're "boilerplate." They're not. They're the only parts that bind you immediately.
• Treating the term sheet as final. It anchors the negotiation, but the definitive documents can still introduce terms the sheet didn't mention. Don't relax until those are signed.
• Skipping legal review of control terms. You can negotiate the economics yourself, but have a lawyer read the protective provisions and board terms before you sign.

Term Sheet vs. Other Preliminary Documents

A term sheet isn't the only "we agree in principle" document in business. It helps to know where it sits.

A letter of intent does the same job in acquisitions and asset deals, usually written as a prose letter rather than a bulleted summary. A memorandum of understanding records a broader, often non-commercial alignment between parties; our memorandum of understanding guide covers when an MOU is the right tool instead.

Once a financing closes, the term sheet's promises become real in longer agreements. The equity, voting, and transfer rules end up in a shareholder agreement for a corporation, or, for an LLC, in the operating agreement. See our guide on what you need before you start an operating agreement. The term sheet is the sketch; these are the blueprint.

When You Need a Term Sheet

Use one whenever real money and real control are on the table and both sides want to agree on shape before paying lawyers to draft. Typical moments:

• Raising a priced round (a Seed, Series A, or later equity financing).
• Taking a lead angel investment where the angel wants defined rights.
• Negotiating a strategic or corporate investment with a partner who wants board visibility.
• Structuring a convertible round where the conversion mechanics and cap need to be agreed up front.

In each case, the term sheet saves money. Lawyers are expensive; settling the economics on a one-page summary first means you only pay them to paper a deal you've already agreed.

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Generate Your Term Sheet with Contractable

Writing a term sheet is manageable once you know which clauses carry the weight and which are negotiable. The hard part is getting the binding sections, the liquidation preference, and the option pool right for your specific round. Contractable generates a clean, customized term sheet in seconds, with sensible defaults on the terms that matter and clear language on what binds and what doesn't. No lawyers or legal background required.